Options Theory for Professional Trading

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Futures was more popular among the two until options strategies zerodha market meltdown in after which the popularity of options has increased tremendously, much more than futures today. Following are the reasons which probably attributed to the increase in popularity of options on the NSE:.

For holding a future position, you would need NSE stipulated margins which would work upwards of Rs based on what future contract you are options strategies zerodha whereas in options a trader with even Rs in his account could take some kind of an option position.

Future positions have unlimited risk, whereas in option buying the risk is limited to the premium you are paying. STT Security Transaction Tax charged by the government for Future is charged on the contract value whereas for options it is charged on the option premium. Option Strategy is a tool which we have introduced on Zerodha Trader which suggests you and helps build option strategies. Find following brief on how to use it: Login to ZT and make sure you launch plus while logging in.

Option Strategy tool, based on options strategies zerodha view suggests you various option trading strategies and their payoff graphs. As an example, if my view is that nifty will stay in the range of and for this expiry NOV First step is for you to add all the nifty option strikes in this range on your market watch, so options strategies zerodha — Calls and puts with November expiry.

Visit this blog to know how to add options onto market watch. Once options strategies zerodha give a view the tool will suggest you 5 different strategies, as shown below. For the example, my view is that nifty will stay between to for Nov expiry. My View is that market will remain neutral that means neither bearish nor bullish and I also feel that market options strategies zerodha be in a very narrow range.

This suggests me 5 different strategies as shown in the pic below. If you are not able to options strategies zerodha the prices in the strategy section, click on the restore button as shown below. The window will look like below when you click on the restore button and the prices should start refreshing as the data is fetched from your market watch. So Ensure that the option contracts mentioned is available on the market watch as mentioned in point 2.

See the Pic below:. Once you have decided to take an option trade, if it involves writing options selling optionsuse the Zerodha SPAN calculator to know the exact margins required. Positions like the above will have margin benefits as they are partially hedged. But when you write options i. So to sell calls of nifty first and then buy back you would need almost 30k for an overnight trade. This margin goes down for a strategy mentioned in the above pic because the various option postions are counteracting each other.

Yes you can trade naked options i. Use this tool to help setup option strategies, study the payoff graph and options strategies zerodha trading options at Zerodha. Madhan, we give margins for option writing intradaypretty high actually. Hi sirfor option writing in Bank nifty Weekly Options for overnight Position what is options strategies zerodha margin options strategies zerodha, i have checked in calulator it is showing around per lot is this the right margin for overnight Position in option writing ……….

Hey Venky, the margin requirements are defined by our RMS team based on the liquidity and prevalent market conditions. The weekly option contracts do not have enough liquidity to afford very high leverage. Sir am new to it,am holding a account in zerodha,I want to learn the strategy of trading plz do refer for it,to options strategies zerodha I have to contact. Suggest you to look at this: Interesting tool very helpful for people like me who trade on options strategies zerodha.

So that I can open 2 or more graphs. Arm, the above would be beneficial to people who have an understanding on options. If I have 1L in my trading account, can I do the following option options strategies zerodha.

Sell 3 contracts of Bank Nifty March put for Buy 3 contracts of Bank Nifty March put for I want to hold the position for few weeks. Please tell if my thinking is correct.

Margin required for only writing put per lot is Rs For taking 3 such positions, you will need 45k in your account. The way you have calculated margin requirements is wrong, that is why we have introduced http: Thank you very much for the prompt reply. I was wondering if you guys could open an official forum for Zerodha members so that we options strategies zerodha help each other out instead of disturbing the faculty. Hello, Is there a way we can exercise the options in Zerodha Trader?

If so, can options strategies zerodha please tell me how to do it? All options on NSE today are european now, which means you can exercise it only on the expiry day. In any case on the expiry day all options get exercised by default, so need to have this facility as long as the options are european. In PnL 3rd screenshot in this write up only the Net premium paid is shown and not profit potential.

How to check the profit options strategies zerodha How to add options strategies zerodha own strategy, if not available now, please make it available soon. Last is basically the last traded price and best is basically the options strategies zerodha available price.

If both are the same, the result will show the same. In the payoff graph, and pay off, break even is missing, options strategies zerodha is a key factor in determining which strike price to be taken for trade.

The pay off graph is not showing the pay off in between the strike price, say nifty atcorresponding pay off is not showing, which is also vital. Abrar, Feedback taken, let me bounce it off my tech options strategies zerodha and options strategies zerodha how much time they will take to sort this.

Also there is a error in bearish strategy, instead of market wont fall, it should be market wont rise. Hi… I want to sell one lot put and one lot call. Is this for intraday or shall i carry till expiry… If that is for intraday, how much options strategies zerodha i have to carry til expiry? Hi Kindly go through the following scenario: Nifty trading at then took Iron Condor as follows: Yes Sreejith it will be, you cannot hold opposite positions of same contract on a single trading account.

In equities, this can be done only on an intraday basis. For Futures, you can sell and hold until expiry by paying the margin amount for holding that short position. Option writers may not necessarily own the asset but they still take on the obligation to deliver the asset if the conditions are met for which they receive a small premium from the buyer of the option. Dear Zerodha team, I cannot see the implied volatility figures for options.

The pop up window shows all values as zero. How can I sell the lot I bought back at ? Do I need to open a sell order for that or can I simply square-off the position like in equity? Go to Admin positions and click on the open position and say square off, this will sell it at market. Could you tell me where is it located in that page? Or is it not visible during off-market hours? The starter pack is free of cost which includes option strategy, charting, and more.

Options strategies zerodha are certain products on Plus which are paid, you can see more here: I have never traded a option but i want to do some trade in it. For example Nifty CE was trading at around in morning. So to have profit shall options strategies zerodha buy call or put option? And i know call is like long and put is like short position. So if market is bullish i shall buy call and if options strategies zerodha is bearish i shall options strategies zerodha puts? I am actually having a big doubt among the 4 thing And one more thing lets say Nifty CE is trading at then what margin i require to have a long position?

Phew, you are starting at the very basic. Buy Calls, if the market goes up, premium will ideally go up and you can profit. But there are days when market could go up but calls premium could loose you money when the implied volatility drops, for example today, even though market is up call premiums are down.

When you options strategies zerodha calls, profits are unlimited but the risk is limited to the premium you pay. You can Short puts, when market goes up, put values will come down and hence if you are short puts you can profit. When you short options, the risk is unlimited and profit is limited to the premium you receive when you short the option. Since the risk is unlimited, a margin is blocked in your trading account similar to futures.

Long calls and short puts, ideally will make you profit when market goes up, but they are completely different in terms of how you make money and similarly with long puts and short options strategies zerodha. Nitini am new to this fieldthe link which you have provided doesnt have any pdf ,which can explain options and its characteristics. Have you checked out Varsity?

Our education initiative, has become quite popular. Hello sir please make me understand Buy price and buy average price and how is buy average price related to settlement price and why it changes on daily basis options strategies zerodha options? Confused with your question Praveen.

If you buy 1 lot at Rs 50, your buy price will show 50 and buy average price will also show If you buy the options strategies zerodha lot at Rsyour quantity will show 2 lots and your buy average price will now show 75, which is the average of 50 and I just cant understand how my buying Options strategies zerodha price shoot upto On the trading platform, your profits for options strategies zerodha will show based on the closing price of the options for yesterday and not based on options strategies zerodha buying price and this is the reason you are seeing a loss and not options strategies zerodha on the platform today.

No there is no daily settlement on buy option positions, so if you bought on 29th May Rs will get debited from your account and when you sell at 80, Rs is credited to your account.

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How many times have you been in a situation wherein you take a trade after much conviction, either long or short and right after you initiate the trade the market moves just the other way round? All your strategy, planning, efforts, and capital go for a toss. In fact this is one of the reasons why most professional traders go beyond the regular directional bets and set up strategies which are insulated against the unpredictable market direction.

Over the next few chapters we will understand some of the market neutral strategies and how a regular retail trader can execute such strategies. Long straddle is perhaps the simplest market neutral strategy to implement. The market can move in any direction, but it has to move. To implement a long straddle all one has to do is —.

Here is an example which explains the execution of a long straddle and the eventual strategy payoff. Long straddle would require us to simultaneously purchase the ATM call and put options. As you can see from the snapshot above, CE is trading at 77 and PE is trading at The simultaneous purchase of both these options would result in a net debit of Rs. The idea here is — the trader is long on both the call and put options belonging to the ATM strike. Hence the trader is not really worried about which direction the market would move.

If the market goes up, the trader would expect to see gains in Call options far higher than the loss made read premium paid on the put option. Similarly, if the market goes down, the gains in the Put option far exceeds the loss on the call option.

Hence the market direction here is meaningless. Let us break this down further and evaluate different expiry scenarios. Scenario 2 — Market expires at lower breakeven This is a situation where the strategy neither makes money nor loses any money.

If you think about it, with respect to the ATM strike, market has indeed expired at a lesser value. So therefore the put option makes money. However, the gains made in the put option adjusts itself against the premium paid for both the call and put option, eventually leaving no money on the table.

Scenario 3 — Market expires at at the ATM strike At , the situation is quite straight forward as both the call and put option would expire worthless and hence the premium paid would be gone. The loss here would be equivalent to the net premium paid i. Scenario 4 — Market expires at upper breakeven This is similar to the 2 nd scenario we discussed. This is a point at which the strategy breaks even at a point higher than the ATM strike.

Hence the strategy would breakeven at this point. Scenario 5 — Market expires at , call option makes money Clearly the market in this scenario is way above the ATM mark. The call option premiums would swell, so much so that the gains in call option will more than offset the premiums paid. Let us check the numbers —. So as you can see, the gain in call option is significant enough to offset the combined premiums paid.

Here is the payoff table at different market expiry levels. As you can observe —. We can visualize these points in the payoff structure here — From the V shaped payoff graph, the following things are quite clear —. In summary, you buy calls and puts, each leg has a limited down side, hence the combined position also has a limited downside and an unlimited profit potential. Hence the direction does not matter here. But let me ask you this — if the direction does not matter, what else matters for this strategy?

Yes, volatility matters quite a bit when you implement the straddle. I would not be exaggerating if I said that volatility makes or breaks the straddle. Have a look at this graph below — The y-axis represents the cost of the strategy, which is simply the combined premium of both the options and the x-axis represents volatility.

The blue, green, and red line represents how the premium increases when the volatility increases given that there is 30, 15, and 5 days to expiry respectively. As you can see, this is a linear graph and irrespective of time to expiry, the strategy cost increases as and when the volatility increases.

Likewise the strategy costs decreases when the volatility decreases. Remember the cost of a long straddle represents the combined premium required to buy both call and put options. In other words, you are likely to double your money in the straddle provided —. Now, this also means you will lose money if you execute the straddle when the volatility is high which starts to decline after you execute the long straddle.

This is an extremely crucial point to remember. Since we are long on ATM strike, the delta of both the options is close to 0. Recall, delta shows the direction bias of the position. Given this, a 0 delta indicates that there is no bias whatsoever to the direction of the market. On the face of it a long straddle looks great. Think about it — you get to make money whichever way the market decides to move. All you need is the right volatility estimate. Therefore, what can really go wrong with a straddle?

Well, two things come in between you and the profitability of a long straddle —. Keeping the above two points plus the impact on volatility in perspective, we can summarize what really needs to work in your favor for the straddle to be profitable —.

From my experience trading long straddles, they are profitable when setup around major market events and the impact of such events should exceed over and above what the market expects. Let us take the Infosys results as an example here. If you were the set up a long straddle in the backdrop of such an event and its expectation , and eventually the expectation is matched, then chances are that the straddle would fall apart.

This is because around major events, volatility tends to increase which tends to drive the premium high. So if you are to buy ATM call and put options just around the corner of an event, then you are essentially buying options when the volatility is high. When events are announced and the outcome is known, the volatility drops like a ball, and therefore the premiums. This would essentially take the market by surprise and drive premiums much higher, resulting in a profitable straddle trade.

You cannot setup a straddle with a mediocre assessment of events and its outcome. This may seem like a difficult proposition but you will have to trust me here — few quality years of trading experience will actually get you to assess situations way better than the rest of the market.

HI,sir How many days will it take to complete this OPtion Strategy module and how many lessons are left? Sir when u start module — Trading Psychology and Money Management.. Please Start Trading Psychology module as soon as possible.. Its my opinion that without knowing Trading psychology and money management… No one can become successful trader..

Ur writing skill is superb.. I have been waiting for Trading Psychology module for 5 months…still I think I have to wait months. OK … No Problem Sir.. Please suggest me some best book.. This is one of the good books on this subject — http: Yes this works out perfectly when the direction of the market trend is one sided, either well up or well down. Sir, I am eagerly waiting for PDF modules. When can we get it?? As they are more suitable for printing and reading.

Rest would work the same way. Would there be a scenario when a long straddle is better than a long put straddle? The strategy that you are talking about — isit like buying Futures plus buying put? If yes, this would be an expensive strategy as it requires margin deposits for the futures. Sir, Long future and long put will it not be equal to long call synthetic? Its pay out will be entirely different from the long straddle.

Just a minor thing. Your profit would be future price-strike price-premium if the script appreciates or strike price-future price-premium if the script depreciates. Am I right Karthick? Sushreet — I guess the best way to understand the payoff would be to actually plot it and visualize it on excel. Whenever we have more than 2 option legs, the payoff are tricky and you need to visualize it to understand how they work.

Long Call and short put would make a synthetic call and its payout will be similar to that of a long futures, and yes, it is completely different from a long straddle. Thanks for point the graphics bit: Request you to kindly send somebody to explain the whole procedure of buying and selling on the website. Meanwhile you can also go through this chapter — http: An observation which I would like to share.

VIX decreases from But increase in call option is only 9 points, whereas put option decreased by 20 points. Why is the increase in call option less than put option? In this case volatility dropped and market increased , both are favorable for the drop in Put premiums 2 Call option has gone up because the markets increased, but then volatility has dropped which limits the increase in premiums.

Shravan — you can find all the details here — http: The only two things to keep in mind while doing BTST — look for high volume breakouts and trade only liquid stocks!